Arranging a Mortgage
What is a Mortgage?
A mortgage is made up of two parts: principal and interest. Principal is the actual amount borrowed. Interest is the lender's fee you are charged for borrowing.
You'll have to decide on an amortization period (the length of time it will take to completely pay off the mortgage) and the term, or length of time each mortgage agreement guarantees the interest rate.
Before you go to a financial institution or mortgage broker, keep in mind that there are many mortgage options available. Shop around for the best rates and the best terms. Negotiate. Everyone wants your business, but it's up to you to look after your interests. Of course, the key thing to remember is to negotiate a mortgage that fits into your lifestyle, and doesn't take over your life! Your mortgage broker can help guide you through this process and supply you with information.
Amount of the Mortgage
With lower interest rates, you may qualify for a larger mortgage because your monthly payments will be lower. But always keep in mind that the larger your mortgage, the more interest you'll pay in the long run. That simply means your house will cost more. Also, what if interest rates rise? Will you still be able to carry the payments comfortably?
Before considering any mortgage, consider your down payment. If you're a qualified home buyer, you can purchase a house with a minimum 5% down payment. On a $160,000 home that would be an $8,000 down payment, leaving you with a $152,000 mortgage. Assuming you negotiate an interest rate of 8% for your mortgage, you're monthly payment for principal's interest would be $1160. Now let's say you decide to wait until you save another $10,000 before you buy because you think the bigger down payment will lower your monthly payments. Well, at 8%, putting $10,000 more down on your house will only save you $76.32 per month, you might be better off saving $10,000 for a rainy day or a vacation or that hot tub you've been dreaming about. With today's interest rates, it just doesn't make sense to tie up your cash to save $76.32. You might be better off putting your extra money to work for you in another investment with a higher rate of return.
Conventional and High Ratio Mortgages
To qualify for a conventional mortgage, you simply have to have a 25% down payment of the purchase price, with the mortgage not exceeding 75% of the appraised value. If your down payment is less than 25%, then you qualify for a high-ratio mortgage. This type of mortgage requires loan insurance, which can cost an additional 0.5% to 3.75% of the mortgage amount. With this type of mortgage you could also be limited to a maximum house price.
Pre-Approved Loans: Obtaining a Pre-Approved Mortgage
Why go house hunting only to find that you don't qualify for a mortgage on the dream home you've found? Having a pre-approved mortgage will give you the confidence of knowing exactly what you can spend on a home before you start looking. You will also be protected against interest-rate increases while you look for your new home.
Once you've done your homework and shopped for the best rate, meet with the loans officer to arrange a pre-approved mortgage and discuss the features you're looking for to tailor payments to your needs. It could take a few days, but give your lending institution about two weeks. It will eliminate potential headaches down the road.
Pre-Approved Mortgage Features to Look For
- Competitive interest rates. You may be willing to pay a little more to get the flexible features you desire.
- A 90-day rate guarantee. This will protect you against rising interest rates while allowing you to take advantage of falling rates.
- Flexible payment options. These enable you to tailor the mortgage to your lifestyle. Discuss payment frequency and lump-sum payment options. Find out if your lending institution will allow you to skip a payment in special circumstances or double-up on your payments.
- Closing Costs: ask about the lender's policy with respect to realty tax holdbacks on closing.